Senate Investigation Singles Out Goldman Sachs, Finds 'Rampant Conflicts of Interest' Responsible for Financial Crisis

April 14, 2011 -- It was a year ago this month when Sen. Carl Levin, chairman of a Senate subcommittee investigating the financial crisis, ripped Goldman Sachs' top executives in an intense congressional hearing. Levin was brandishing an email in which a former Goldman employee described a mortgage-backed deal as "sh**ty."

Thomas Montag, Goldman's former head of sales, had written to Daniel Sparks, then head of the mortgage desk, describing a $1 billion set of mortgage-backed investments sold by the firm as "one sh**ty deal." Five months later, the transaction -- Timberwolf Ltd. -- had lost 80 percent of its value.

"Do you think it was a sh**ty deal?" Levin, D-Mich., asked Sparks. "If you can't give a clear answer to that one, Mr. Sparks, then we're not going to get any clear answers from you today."

While lawmakers got few clear answers that day, Levin and Republican Sen. Tom Coburn of Oklahoma plowed ahead with their investigation, culminating in a 635-page report on the financial crisis issued this week.

In the new report released late Wednesday, Levin and Coburn unveiled new documents that they believe prove that Goldman took "short" positions; in other words, they bet against the mortgage market in an effort to profit when the market went south. The lawmakers contend that Goldman was designing, marketing, and selling mortgage-backed securities such as Timberwolf that created conflicts of interest with the investment giant's clients because the firm would profit when the risky loans went sour, while the clients -– unaware that Goldman was betting against the same loans -– would suffer substantial losses.

"Our investigation found a financial snake pit rife with greed, conflicts of interest, and wrongdoing," Levin said in releasing the report.

"The free market has helped make America great, but it only functions when people deal with each other honestly and transparently," Coburn said. "At the heart of the financial crisis were unresolved, and often undisclosed, conflicts of interest. Blame for this mess lies everywhere from federal regulators who cast a blind eye, Wall Street bankers who let greed run wild, and members of Congress who failed to provide oversight."

Goldman Sachs Rebuts Senate Report

In addition, the senators questioned the accuracy of the testimony given by Goldman Sachs' executives, including CEO Lloyd Blankfein, at the April 2010 hearing.

"We didn't have a massive short against the housing market and we certainly did not bet against our clients," Blankfein told the panel that day. "Rather, we believe that we managed our risk as our shareholders and our regulators would expect."

Levin told reporters at a news briefing this week that "Goldman clearly misled their clients and they misled the Congress."

Michael DuVally, a spokesman for Goldman Sachs, responded to the Senate report in a statement contending that the testimony was "truthful and accurate."

"The testimony we gave was truthful and accurate and this is confirmed by the subcommittee's own report," DuVally said. "The report references testimony from Goldman Sachs witnesses who repeatedly and consistently acknowledged that we were intermittently net short during 2007. We did not have a massive net short position because our short positions were largely offset by our long positions, and our financial results clearly demonstrate this point."

"While we disagree with many of the conclusions of the report, we take seriously the issues explored by the subcommittee," he said. "We recently issued the results of a comprehensive examination of our business standards and practices and committed to making significant changes that will strengthen relationships with clients, improve transparency and disclosure and enhance standards for the review, approval and suitability of complex instruments."

The firm agreed in July to pay $550 million to settle civil fraud charges with the Securities & Exchange Commission. The $550 million penalty was the SEC's largest ever against a Wall Street firm.